Audit of Financial Statements In Italy

The Italian 1942 Civil Code mandated capital-based companies requiring a statutory audit to appoint a board, ―Statutory Board of Auditors‖ (un Collegio Sindacale) of between 3 and 5 individual auditors (Revisori Contabili) to carry out an ‗institutional internal audit‘.⁴⁰³ The Civil Code, Article 2488 states that the Collegio Sindacale must be appointed if certain conditions relating to size of the company⁴⁰⁴, share capital are met.

For the first time in Italy, through the Presidential Decree No 136 of 1975, the requirement for the external audit of listed companies was introduced under the Il Commissione Nazionale per le Societa e la Borsa (CONSOB) – the stock exchange regulatory authority.⁴⁰⁵ This compulsory external audit requirement has since been extended to a wide range of entities such as state-owned companies.⁴⁰⁶ The L’Ordine dei Dottori Commercialisti ( graduates in Economics and Commerce) and L’Ordine dei Ragionieri e Periti Commerciali (College of Accountants and Commercial Experts – high school diploma) supported the continued existence of the traditional audit board ( sindaci) in the interests of most of its members.⁴⁰⁷ As a result, Decree no 127 in 1991 whilst

400 M Cameran, 'Audit Fees and the Large Auditor Premium in the Italian Market' (2005) 9 (2) International Journal of Auditing 131

401 See JE Stevenson, 'Auditor Independence: A Comparative Descriptive Study of the UK, France and Italy'(2002)6 (2) International Journal of Auditing 163 and also M Cameran 'Audit Fees and the Large Auditor Premium in the Italian Market' (2005) 9 (2) International Journal of Auditing 131

402 ibid

403 J Stevenson, 'Auditor Independence: A Comparative Descriptive Study of the UK, France and Italy' International Journal of Auditing p 163

404 As set forth in article 2345 bis of the Civil Code; see Federation des Experts Comptables Europeens Enforcement Mechanisms in Europe: A Preliminary Investigation of Oversight Systems (April 2001)40

405 J Stevenson, 'Auditor Independence p 164

406 ibid

407 ibid

imposing a statutory external audit requirement on some classes of businesses, allowed for continued operation of the sindaci.⁴⁰⁸

Whilst the Collegio Sindacale is mandatory for all companies where an audit of the accounts is required, the use of external auditors is compulsory only in companies which are required to get an audit opinion.⁴⁰⁹ The audit company must be authorised by the Security and Exchange Commission, CONSOB.⁴¹⁰ In outlining the responsibilities of the Board of Statutory Auditors, the Italian Civil Code did not distinguish between listed and non listed companies.⁴¹¹

The Collegio Sindicale performs audits restricted to particular account balances and fiscal/social security areas and as a result, duties of the Collegio Sindicale and those of full auditors overlapped.⁴¹² The Draghi law (Decreto Legislativo 24 febbraio 1998 no 58 – Decreto Draghi) attempted to clarify the apparent overlap of audit duties between the sindaci and the societa di revisione ⁴¹³ in listed companies by making inapplicable almost halfof the Civil Code provisions for sindaci in these companies.⁴¹⁴ It addresses the overlap of audit duties for some companies (more importantly for the listed companies), in that the Collegio Sindicale of some of the companies subject to the Draghi law have no audit responsibilities – these responsibilities having been transferred to external accountancy firms.⁴¹⁵

In relation to non listed companies, the Italian Civil Code⁴¹⁶ states that the Board of Statutory Auditors must perform operations to verify the correctness of accounting, cash accounts, existence

408 ibid

409 Federation des Experts Comptables Europeens Enforcement Mechanisms in Europe: A Preliminary Investigation of Oversight Systems (April 2001) 43

410 ibid

411 Federation des Experts Comptables Europeens Enforcement Mechanisms in Europe: A Preliminary Investigation of Oversight Systems (April 2001)40

412 M Cameran, 'Audit Fees and the Large Auditor Premium in the Italian Market' (2005)9 (2) International Journal of Auditing 131

413 Practically the Italian branches of the Big Five

414 J Stevenson, 'Auditor Independence : A Comparative Descriptive Study of the UK, France and Italy' International Journal of Auditing 164

415 M Cameran, 'Audit Fees and the Large Auditor Premium in the Italian Market' (2005)9 (2)International Journal of Auditing 131

416 Article 2403

of investments and other assets of the company every three months.⁴¹⁷ As well as other proposals and provisions, the final report on the draft of financial statements should summarise activities and the results of such activities.⁴¹⁸

Legislative Decree no 58 of the 24 February 1998 effective from the 1st July 1998 exempted some provisions included in the Italian Civil Code for listed companies and describes the roles and responsibilities of the Board of Statutory Auditors for listed companies.⁴¹⁹ These roles include the oversight of the company's compliance with the Italian Civil Code and Articles of Incorporation, the appropriateness of the administration which includes the internal system of controls and administrative functions.⁴²⁰ The Board of Statutory Auditors are also required to report to CONSOB if they are aware of any irregularities during the performance of their control functions.⁴²¹ Irregularities relating to the directors' operations within the company can also be reported to any competent court.⁴²² All other areas required by the Italian Civil Code to be verified by the Board of StatutoryAuditors became the exclusive responsibilities of the external auditors for the company.⁴²³ However, this law did not result in change for most companies operating in Italy.⁴²⁴ It gave the societa di revisione sole responsibility for the control of client accounting – including verification of underlying accounting records, however the sindaci are still required to express and report an opinion on the financial statements.⁴²⁵ Further change occurred through the reform of the Italian commercial law in 2001 whereby the possibility to appoint a full auditor (individual or audit firm) instead of a Collegio Sindicale was given in some cases.⁴²⁶ This reform came into effect on 1 January 2004 and provided an option to the company to choose whether or not to employ an individual auditor or an audit firm instead of the Collegio Sindicale – thereby changing the obligation under prior legislation of limited liability companies to appoint a Collegio Sindicale (or

417 Federation des Experts Comptables Europeens Enforcement Mechanisms in Europe: A Preliminary Investigation of Oversight Systems (April 2001) 41

418 ibid

419 ibid p 40

420 ibid pg 41

421 See Article 149 co 3 of the Legislative Decree no 58; ibid

422 ibid

423 Ibid p 41

424 ibid

425 J Stevenson, 'Auditor Independence : A Comparative Descriptive Study of the UK, France and Italy' International Journal of Auditing p 164

426 M Cameran, 'Audit Fees and the Large Auditor Premium in the Italian Market' (2005)9(2) International Journal of Auditing 131

according to the new law, a full auditor).⁴²⁷

The EC Eight Directive was implemented in Italian law in 1992 and as a result, the statutory auditor (Revisore Contabile) is required to be enrolled on a register held by the Ministry of Justice and hold one of two recognised professional qualifications.⁴²⁸ One of the two professional qualifications must be from either L’Ordine dei Dottori Commercialisti (graduates in Economics and Commerce) or L’Ordine dei Ragionieri e Periti Commerciali (College of Accountants and Commercial Experts).⁴²⁹ This objective was only partially achieved as whoever was sindaco for at least three years before the law was enforced, regardless of his school/academic qualifications, was automatically enrolled on the new register. These bodies appoint a commission (Commissione per la Statuizione dei Principi di Revisione) to issue auditing statements.⁴³⁰

In addition to statutory audit – that is, the external audit of listed companies and other bodies and the quasi-internal audit by sindaci, there is growing preference for voluntary audit in Italy due to many reasons and there are now more companies undertaking voluntary audits than there are companies for whom a statutory audit is required.⁴³¹ Individual auditors are allowed to perform voluntary audits.⁴³² The Civil Code⁴³³ details provisions regarding accounting and auditing and with over 70,000 accounting professionals now in Italy, it has the second largest number of accounting professionals in Europe after the UK.